Accounting and Disclosure System in Japan
Japanese GAAP
Business Accounting Principles issued by the Business Accounting Council (BAC), Accounting Standards issued by the Accounting Standards Board of Japan (ASBJ), and Practical Guidelines issued by the JICPA are deemed to be the generally accepted accounting principles (GAAP) in Japan.
In 2001, the Financial Accounting Standards Foundation (FASF) was established through the concerted efforts of ten leading private-sector entities including the JICPA. The ASBJ was organized under the auspices of the FASF as an independent and private-sector entity to develop accounting standards in Japan. The JICPA not only provides funding to the FASF, but also takes part in setting accounting standards by sending board members to the FASF and the ASBJ. Additionally, many CPAs participate in various technical committees at the ASBJ as technical staff.
The standard setters have been succeeding in narrowing the gap between Japanese standards and International Financial Reporting Standards("IFRSs") in recent years. The financial statements according to the regulations below contain few differences with IFRSs or US GAAP.
Triangular Legal System
There are three laws which prescribe financial accounting and reporting in Japan; the Commercial Code, the Securities and Exchange Law, and the Corporate Income Tax Law. Several related laws and regulations for them are also applicable.
The Commercial Code requires joint-stock corporations (Kabushiki Kaisha) to prepare an annual report basically on individual basis. The annual report submitted to the general meeting of shareholders has to include the balance sheet, the income statement, the business report and the profit appropriation/loss disposition proposal. The Code also requires certain "large corporations" (as defined by the Code) to include designated consolidated financial statements (i.e. the balance sheet and the income statement) in the reports of the business years ending in or after April 2004.
Under the Securities and Exchange Law, each "issuer" of designated securities is required to file annual and semi-annual reports with the Prime Minister and copies of those with the stock exchange(s) where its securities are listed. The financial statements prepared for the purpose of securities registration and periodic reporting under the Law have to include the consolidated balance sheet, the consolidated income statement, the consolidated statement of retained earnings, the consolidated statement of cash flows, and supporting schedules thereto;the balance sheet, the income statement, the statement of profit appropriation/loss disposal, supporting schedules thereto.
The financial statements prepared under the Commercial Code and the Securities and Exchange Law are, for the most part, compatible with each other.
The Corporate Income Tax Law provides methods for calculating taxable income and requires that revenues and expenses be recorded in the books of account in order to be qualified under the Law. This requirement sometimes affects enterprise accounting in Japan.
These three laws are firmly interrelated in their accounting objectives and often referred to as the Triangular Legal System.
